High growth, low inflation cushion

High growth, low inflation cushion

The world has seen so much economic chaos of late that crises have become the norm rather than the exception. The most recent, involving Israel, Iran and the US, seems to have subsided, for now. Even if one were to assume that things will not escalate in this theatre — which would disrupt India’s trade and energy supplies — another conflagration could well be on its way. US President Donald Trump’s pause on reciprocal tariffs ends on July 8 and only he knows what will follow. Then there are smaller, but far from insignificant, problems such as China holding back rare earth supplies from large parts of the world, including India. In short, the global economic climate will continue to remain uncertain going forward.

PREMIUM While the growth rate has seen a significant slowdown in the past couple of years, it is still expected to be a healthy 6.5% for the ongoing fiscal year. (REUTERS)

It is in this bearish external environment that the Indian economy is drawing a lot of comfort from domestic factors. The benchmark inflation rate has been below the 4% target for four months now. The Reserve Bank of India (RBI) expects it to remain below 4% until the December quarter. It is this confidence that allowed RBI to frontload its monetary easing and administer a rate cut of 50 basis points earlier this month. While the growth rate has seen a significant slowdown in the past couple of years, it is still expected to be a healthy 6.5% for the ongoing fiscal year which will keep India as the fastest growing major economy in the world. RBI’s monthly bulletin, released on June 25, underlines precisely this message. RBI’s latest commentary will soothe sentiment both inside and outside the economy on India’s short-term economic prospects.

Having said this, it is important to note that policy challenges for medium-term and long-term economic prospects will need careful handling. These challenges will include negotiating trade deals, most importantly with the US, finding a way to pivot even more towards domestic factors for economic growth even though India’s export book never really regained its pre-global financial crisis mojo, and bracing for capital market disruption that could arise from the precarious fiscal position of advanced economies. But none of these take away from the immediate economic comfort of low inflation and decent growth.